Tag Archives: deed-in-lieu

The HOT topic for real estate that everyone was talking about coming up to the new year is official, but with an asterisk regarding the extensions of the Mortgage Forgiveness Debt Relief Act and American Taxpayer Relief Act. This is a little lengthy article, but worth your extra 15 minutes to digest. While federal government has extended the tax law, California to this date has not extended their tax law, but more importantly the Mortgage Debt Forgiveness has been definitely extended. What does all this mean to you and your situation, whether owner-occupied or an investment property that is upside down and you’re wanting an answer to what you have to do, CALL ME for help. Letting a property go to foreclosure or doing a Deed in Lieu could put you in a liability situation for all the debt of a Trust Deed. I work with CPAs and attorneys that can help. After over 20 years of short sales, hundreds closed, you owe it to yourself to only talk to the BEST! CALL NOW! JOHN A SILVA — 619-890-3648. MAKE IT YOUR BEST YEAR!

III. Extension of Mortgage Cancellation of Debt Relief

Q 4. What is mortgage cancellation of debt relief?

A. As a result of a foreclosure on a recourse loan, a short sale or a deed in lieu of foreclosure, a lender may cancel, reduce or forgive the debt that the borrower owes on the loan. The IRS and the California Franchise Tax Board consider this cancelled or forgiven debt as income to the borrower. As a result, the forgiveness or cancellation of the whole or a portion of the loan balance, often termed “cancellation of debt income,” may result in a tax liability.

The cancellation of debt income is generally treated as “ordinary income,” as opposed to capital gains income which is taxed at a lower rate, and the taxpayer will typically receive a 1099 tax form from the lender in the amount of the cancellation of debt.

Under the tax law there exist various situations where the cancellation of debt income is not taxable including bankruptcy, insolvency and when there is a foreclosure on a non-recourse loan. However, for most homeowners involved in a short sale, foreclosure or deed in lieu of foreclosure, the tax relief provided by the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by President Bush on December 20, 2007 and subsequently extended by the Emergency Economic Stabilization Act of 2008, provides the most important protection against having to pay tax on the cancellation of debt income.

As a result of the Mortgage Forgiveness Debt Relief Act of 2007, Internal Revenue Code §108(a)(1) (E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:

The property sold in the short sale is the taxpayer’s principal residence, as that term is used in IRC §121.

The cancellation of debt is Qualified Principal Residence Indebtedness under IRC Section 163(h)(3)(B). Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. The income relief provided is capped at $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others. Any reduction of indebtedness excluded by IRC §108(a)(1)(E) will be applied to reduce the basis of the taxpayer’s principal residence, but not below zero. This could result in a higher amount of capital gains tax owed by the taxpayer. Also the cancellation of debt relief provided by the law, therefore, does not apply to any portion taken as “cash out” and not used to substantially improve the residence.

Q 5. How does the American Taxpayer Relief Act affect the mortgage cancellation of debt relief?

A. The original law applied to indebtedness discharged before January 1, 2010. That end date was extended by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008. The new law extends the date one year further to any indebtedness discharged prior to January 1, 2014.

Q 6. Does the federal law apply to potential cancellation of debt income under California tax law?

A. No. California has its own cancellation of debt relief law which has been codified as California Revenue and Tax Code Section 17144.5 which is similar to the federal law but with some significant differences (see next question). That law has expired. However, C.A.R. has sponsored Senate Bill 30 (Calderon, D- Montebello) to extend California’s debt relief protections which is currently pending. The proposed law would be effective retroactive to January 1, 2013. Information on the status of the bill can be found at www.leginfo.ca.gov.

Q 7. What are some of the differences between the state and federal law on cancellation of debt on qualified principal residences?

A. California law has different limits for maximum indebtedness and the amount of cancellation of debt income that can be forgiven which are detailed below:

The maximum amount of qualified principal residence indebtedness is $800,000 for married couples filing jointly, registered domestic partners filing jointly, single persons, head of household, or widow/widower; and $400,000 for married couples or registered domestic partners filing separately;

The maximum amount of debt relief income that can be forgiven is $500,000 for married couples filing jointly, registered domestic partners filing jointly, single persons, head of household, or widow/widower; and $250,000 for married couples or registered domestic partners filing separately.

This is an excerpt from California Association of Realtors Legal — Part 2 coming next week will be on Taxation of Foreclosures and Short Sale.

Bank of America Corp.is launching a pilot program that will allow homeowners at risk of foreclosure to hand over deeds to their houses and sign leases that will let them rent the houses back from the bank at a market rate.

While the initial scope of the “Mortgage to Lease” program is small—the bank began sending letters Thursday offering leases to 1,000 homeowners in Arizona, Nevada and New York—it represents a big change in the way banks deal with borrowers who can’t afford their mortgages.

Until now, banks have focused the bulk of their borrower outreach on modifying mortgages, usually by reducing the monthly payments. When that doesn’t work, most foreclosure alternatives require homeowners to leave their house, typically through a short sale, in which the bank approves the sale for less than the amount owed. Banks often insert clauses forbidding the new owner from renting the property back to the former owner.

The new approach is unlikely to be expanded unless banks conclude that avoiding eviction reduces costs associated with taking back, maintaining and reselling properties. If a significant number of borrowers are willing and able to rent the homes, Bank of America could ultimately sell the properties to investors that agree to keep them as rentals.

Already, in a growing number of housing markets, investors are buying foreclosures and converting them into rentals, often filling them with families that have gone through foreclosure.

Executives last year began to ask themselves “isn’t there a way to sort of combine that whole process and

keep the borrower in the property? It’s just better for the market,” said Ron Sturzenegger, the Bank of America executive who last summer was put in charge of the unit that handles troubled mortgages.

Bank of America became the nation’s largest mortgage originator after its 2008 purchase of Countrywide Financial Corp., but over the past year it has retreated from the mortgage market. The initial pilot is limited to loans that Bank of America holds on its books. Homeowners can’t apply for the program—only those who receive letters from the bank can participate.

Borrowers would agree to a what is known as a “deed-in-lieu” of foreclosure, where they essentially sign over ownership of the property to the lender. This is less costly to the bank and also does less damage to a borrower’s credit than a foreclosure.

Borrowers selected for the program must be at least two months past due on their mortgage and face considerable risk of foreclosure.

A state-run program that helps homeowners struggling to pay their mortgages now has broader eligibility guidelines, opening up help to borrowers who did “cash-out” refinances and own multiple properties, said California Housing Finance Agency officials on Monday.

The mortgage-aid effort, called Keep Your Home California, so far has helped close to 8,000 low- and moderate-income households that are behind on loan payments or close to default, according to agency leaders.

“This expanded eligibility will allow more families to qualify and receive greater assistance,” said California Housing Finance Agency Executive Director Claudia Cappio, in a statement. “We are continuously evaluating our experience so far and making adjustments like these based on the initial results of the Keep Your Home California program.”

Keep Your Home California has four parts that include: mortgage help for the unemployed, mortgage aid for homeowners with documented financial hardship, relocation help for those in the midst of a short sale or deed-in-lieu of foreclosure, and reduction of principal. The programs, paid for by the U.S. Treasury Department’s Hardest Hit Fund, is costing taxpayers $2 billion.

Monday’s announced changes include:

–Allowing homeowners who completed “cash-out” mortgage refinancing to take part in the four programs. Such borrowers were excluded before.

–Allowing borrowers who own more than one property to apply. Program officials said this will be particularly helpful to those who co-signed on properties for family members.

–Offering mortgage aid to unemployed borrowers for nine months, instead of six. Such homeowners can get up to $3,000 a month. To qualify, you must receive unemployment benefits.

–Reinstating up to $20,000 in past-due mortgage payments instead of the previous $15,000 cap.

Search this site

Search for:

Assisted Living Research Institute has created a dedicated section on their site that provides comprehensive information.
Click to find out more on topics like: available care options, financial support, and free resources that are available.

About John A Silva

As your local real estate adviser in the area of San Diego County with over 27 years of experience, my goal is to provide you with relevant local housing market information, tips, and advice.

Get a free market evaluation on your home and look for homes on the MLS in San Diego County now FREE!!

Subscribe via Email

Follow Me On The Web!

Heal from Foreclosure

For a Compelling Guide to weaving through ALL the experiences of a hardship with applications for coping personally and with family: having to sell Your Home is unbelievably lightened! Anyone that would never consider selling their home, this is a MUST read.